Jailing one young criminal costs the taxpayer as much as £140,000 a year, a report says today. Locking up young offenders makes them more likely to commit further crimes and be unemployed later in life, the New Economics Foundation says.

The think tank calls for drastic cuts in the use of youth custody. Budgets to pay for it should be given to councils and the money reinvested in rehabilitation programmes, the report says.

Last month there were 2,195 children aged 10 to 17 imprisoned in England and Wales. Each costs £100,000 a year and an extra £40,000 in indirect costs to society once they are released.

Aleksi Knuutila, author of the report, said: "Prison costs the public purse about six times more than sending a child to Eton. What really makes our obsessive use of prisons even more of a tragedy is that those resources could have been used to tackle crime much more effectively.

"All the research shows that prison is failing to rehabilitate offenders. At a time when public services are being cut everywhere, we need to ask whether our spending is really delivering."

Juliet Lyon, director of the Prison Reform Trust, said: "Many children who are not a threat to public safety are put behind bars. Community measures have been shown to reduce offending much more effectively."

John Fassenfelt, deputy chairman of the Magistrates' Association, said: "Custody really is the last resort and only used when all other measures have been tried and exhausted.

"It is worthwhile noting that in December last year the number of young people in custody was the lowest since the establishment of the Youth Justice Board.

"This decline is the result of initiatives, not least the increased provision of community-based programmes and better communication between sentencers and youth offending teams. If more programmes such as intensive fostering could be available then the custody rate would almost certainly drop further."

A Ministry of Justice spokeswoman said: "A key part of our approach to youth crime is to prevent young people turning to crime in the first place. Latest figures show there are 20% fewer first time young offenders under 18 years of age than a year ago and the frequency of youth re-offending has fallen by nearly a quarter since 2000.

"In November, we made the biggest change to the youth justice system in a decade when we introduced the Youth Rehabilitation Order, to simplify and ensure consistency of sentencing .

"This gives judges and magistrates a number of options from which they can create a punishment designed specifically to deal with the offender before them.

"Last year we also committed £8.4 million towards effective resettlement and rehabilitation services for young people leaving prison so they can turn their backs on crime. Now over 100 areas are receiving funding specifically for this purpose."